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How Maryland “Broke the Curve”: A Solution For Massachusetts? Part 3

Massachusetts has succeeded in providing health care insurance for all but 2.6% of its citizens. Yet the Commonwealth still struggles to make that coverage affordable. Health care inflation is driving Massachusetts’ system toward a cliff. Total outlays for medical services and products are climbing 8 percent faster than the state’s economy. Unless something is done to rein in the cost of care, health care spending in Massachusetts is projected to nearly double over the next 10 years, hitting $123 billion in 2020. State officials know they must find a way to put a lid on spending so that it grows no faster than the state’s gross domestic product. .

But how?

With that question in mind, The Massachusetts Division of Health Care and Policy (DHCFP) contracted with the RAND Corporation to develop a menu of cost containment strategies and options. In September RAND came back with a report that recommended 12 strategies for reducing health care bills.

Near the top of the list (right after “bundling” payments for doctors and hospitals), Rand suggsted that Massachusetts set hospital prices by “establishing a regulatory board to determine appropriate rates for hospital inpatient, outpatient, and emergency department care, limiting payment to the minimum amount necessary to cover hospital operating expenses, and requiring all payers (both private insurers and Medicare) to adhere to the rates set.

In other words, Rand recommended that Massachusetts consider the “Maryland solution” (a.k.a. the “all-payer” strategy) that I wrote about in parts 1 and part 2 of this post. Here’s a brief summary: In Maryland prices for all hospital services are set by seven commissioners appointed by the governor to four-year terms. When setting rates for at individual hospitals, the Commission takes into account each hospital's wages, charity care and severity of patient illnesses. Hospitals can appeal only to the commission or take the dispute to court.

Advantages of Regulating Hospital Prices

Savings: A review of the Maryland plan published in a recent issue of Health Affairs reports that, since 1976, state regulation of hospital rates has saved $40 billion. Had a similar system been in place over the same period of time for all states, savings would have totaled $1.8 trillion or more .

Two HealthBeat readers commenting on parts 1 and 2 of this post have suggested that while the Commission may be holding down hospital spending, “ state regulation of hospital prices “has merely pushed healthcare [and health care spending] out of hospitals. So if a hospital wants a high tech imaging center or surgical-center on its campus, it gets built on ‘unregulated space’ outside the hospital.” Thus, these skeptics argue that while Maryland may have hospital prices under control, when you look at total medical spending, it is a “high cost state.”

To test their theory, I did some research, and discovered the Kaiser Family Foundation’s “State Health Facts.” First, I looked at Maryland’s health care spending per capita, compared to per capita outlays in other states. It turns out that in 2004, Maryland was spending slightly more than average ($5,590 vs. $5,283) —but less than sixteen other states including Massachusetts ($6, 683).

Another way to measure healthcare spending is to ask what percent of the state’s Gross Domestic Product it consumes. In Maryland , medical bills equal 13.3% of GDP – once again, right at the national average .

It’s surprising that Maryland’s medical bills aren’t higher. After all, Maryland is located in the Boston/Washington corridor where health care spending tends to be high; it is home to Johns’ Hopkins (a world-class academic medical center which draws some very sick patients); Maryland doctors and hospitals in the Baltimore area are serving a large very poor population who have better access to care than the poor in most states. (In some states, the poor just don’t receive much care, but in Maryland they do: see below.)

There is no evidence that state regulation of hospital prices is shifting cost to other parts of the health care system. If anything , the fact that the state has put hospitals on a budget may be making everyone more aware of waste in the system.

Indeed, according to a 2009 article by Emory University’s Elena Conis,

“The savings and financial stability engendered by the system also receive credit for granting the state the lowest health insurance premiums (as a fraction of income) in the country.”

Better Access to Care for the Uninsured: When the Commission sets prices , it takes into account how much charity care a hospital provides, raising rates to compensate for unpaid bills. Thus, as the Health Affairs analysis points out: “Hospitals therefore have a financial incentive to treat all patients. Meanwhile, the uninsured have access to all hospitals, including private community facilities and the state’s two well-known academic medical centers.”

Moreover, hospitals are not allowed to gouge the uninsured. In other states, when a patient who doesn’t have insurance pays out-of-pocket, hospitals frequently charge him prices that are far higher than the “group rates” that private insurers have negotiated. In Maryland, by contrast, uninsured patients are charged the fixed rates that everyone pays.

Better Care for Medicaid Patients: Typically, Medicaid pays health care providers roughly 30 percent less than those providers would receive if they were caring for a Medicare patient. As a result, the safety-net hospitals that care for many Medicaid patients often operate in the red; they simply don’t have the resources to give all of their patients the care they know they need. (In Money-Driven Medicine I write about how such hospitals are forced to make tough decisions: “ad hoc rationing puts enormous pressure on doctors, nurses and caseworkers who struggle to decide who should receive costly drugs and surgical procedures, who should be moved out of an expensive bed in an ICU and sent back to a nursing home, who should receive a third round of chemotherapy. . ..” )

In Maryland, Medicaid, like Medicare, pays the standard rates set by the Commission.

Financial stability for hospitals. Nationwide, hospitals are hard-pressed to plan their budgets. Typically, they find themselves on a roller-coaster—for a few years, reimbursements are high, and then they plunge, as payers decide to “get tough.” Hospitals never know when Congress will decide to change the rules for Medicare reimbu
rsements —or how annual negotiations with insurers will turn out. Meanwhile, charitable care remains an unfunded mandate. Hospital costs and revenues can fluctuate sharply.

Government rate regulation by an independent Commission has proven far more rational and predictable then either Congress or “the market.” (As I noted in part 1, in this marketplace might makes right: if insurers have more clout, they insist on steep discounts; if large hospitals have the leverage, they demand reimbursements that far exceed their costs.)

In Maryland, prices are pretty equitable across hospitals, and the Commission seems to be paying neither too much, nor too little. On average the state’s hospitals are operating with a 2 percent surplus; for a non-profit this is a comfortable margin Indeed, Health Affairs rerpots, it is wide enough to satisfy bond-rating companies: “Maryland has consistently had the highest proportion of hospitals rated ‘investment grade’ of any state.” At the same time, “while profits in Maryland hospitals have tracked national trends” they “have averaged about 0.7 percent lower on operating and 1.4 percent lower on total margins since 1993. “

Lower administrative costs, greater transparency: In a recent issue of The New England Journal of Medicine, Jonathan Oberlander, and Joseph White argue for “system- wide” cost control, arguing that : “setting standard rules would simplify billing and reduce the related confusion and expense. The staggering price variation in the U.S. health care system would end, significantly reducing administrative expenses for providers who must now maintain costly billing systems and administrative staffs to cope with different insurers’ disparate rules. Standardization would also create more transparency for consumers, who could more easily determine what prices insurers were paying for services and thus their appropriate copayments.”

Why is Maryland the Only State That Sets Hospital Prices?

Maryland wasn’t always unique. At one time some 30 states regulated hospitals reimbursements. .

In many states, the strategy seemed to be saving money. . In a 1991 article published in Health Care Financing Review, Gerard Anderson, a health policy expert at Johns Hopkins Bloomberg School of Public Health, observes that “the final report of the national rate setting study concludes that mandatory programs saved $36 billion dollars from 1969 to 1982 and reduced costs per discharge in States with mandatory programs 12-26 percent. When Schramm, Renn, and Biles (1986) compared six mandatory rate setting States with the non-rates setting States during the period 1976-83 they found that the annual percent change in adjusted expense per admission averaged 3-4 percentage points lower in the States with mandatory rate setting.’’ In addition “ Robinson and Luft (1988) found that, from 1982 through 1986, all-payer rate setting reduced hospital expenditures by 16.3 percent in Massachusetts, 15.4 percent in Maryland, 6.3 percent in New York, and 1.9 percent in New Jersey, compared with the national average.

Yes, Massachusetts was one of the states that set rates. But then the political winds shifted– and states began to deregulate.

Writing in Health Affairs in 1997, former Massachusetts state representative John McDonough points out that most rate-setting deregulations occurred as States where Democrats were replaced with Republican or Independent leaders. He offers some examples: “In 1991 newly elected Massachusetts Governor William Weld, a Republican, made hospital deregulation a central part of his first-year agenda.

In 1995 newly elected Governor Angus King, an Independent, worked with a new Republican majority in the Maine Senate to eliminate their twelve year- old system. In 1995 New York’s first Republican governor since 1974, George Pataki, placed NYPHRM deregulation squarely on the state’s policy agenda.”

While these Republicans favored deregulation, it is worth noting that a earlier generation of pre-Reagan Republicans ushered in rate-setting: “New York’s Nelson Rockefeller presided over the implementation of rate setting in the early 1970s. New Jersey’s Thomas Kean” was also an advocate.

Maryland’s rate regulation survived in part because long-term Democratic majorities in both branches of the legislature combined with Democratic control of the governor’s office set the state apart from This.

According to the Rand report Maryland’s triumph is also due to “proper design of the rate-setting commission.” (Thanks to Igor Gorlach at “A Healthy Blog” for pointing this out .http://blog.hcfama.org/?p=3553) Gerard Anderson points to the fact that in Maryland “rates are hospital specific,” is another factor that “distinguishes the Maryland program from many other rate setting programs.”

The rise of HMOS also led to the denouement of rate-setting in many states. During the late 1980s and early 1990s, as for-profit HMOs flourished, they resisted paying prices set by the state. They hoped to negotiate discounts with hospitals eager to join their networks, and in many cases they did. (Later, hospital consolidation in many regions would give providers the upper hand when bargaining with insurers.)

States hooked on the idea of “managed care” as a way to control costs granted for-profit HMOs an exemption from the rules. So in 1982, Massachusetts chose to allow HMOs unlimited discounting authority. By contrast, McDonough notes, “regulators in Maryland have tightly and successfully limited negotiated discounts (available to all payers, not just HMOs) to no more than 4 percent, and only to insurers who provide certain consumer benefits such as open enrollment. Although payers in Maryland privately grumble, few openly call for deregulation, and none can claim to be suffering inordinately.”

To understand how Maryland hung on to its rate-setting program while other states abandoned the idea, I also think it helps to realize that, in Maryland the idea of rate regulation came not from the state legislature, but from hospitals themselves. As Emory’s Elena Conis points out in her 2009 report: “Initially, it was proposed by the Maryland Hospital Association as a solution to rising hospital costs and the growing problem of uncompensated care.” Government agreed: “Both the legislature and the state had concluded that the unregulated hospital care market was contributing to skyrocketing costs for many hospitals and an inequitable system of care.”

Maryland also recognized that “Government leadership in setting rules for medical care payments was already in place in other countries with a combination of public and private payers, including France, the Netherlands, Japan and Germany; in such all-payer systems [where all payers pay the same rates at a particular hospital] , health care costs were indeed lower.”
r />Conis goes on to describe a system that works because, after nearly four decades, it is perceived as apolitical and generally honest: “The HSCRC [the “Commission”] is politically independent and widely supported by hospitals, public and private payers, and legislators in both political parties. The system is widely regarded as having created a market in which payments are predictable, transparent, and fair, and in which profits have not suffered as a result. Providers are protected from having to negotiate rates with payers; payers, meanwhile, are shielded from the high markups attached to hospitals services in other states; and patient access to hospital care is protected (indeed, the Maryland health Care Commission says that as a result of the system, the state no longer needs public hospitals).

“As HSCRC Commissioner David Young reported in a recent statement, ‘Of all the accomplishments of the All-Payer System in its thirty-eight year history, and there have been many, nothing stands out to me more than the willingness of all participants – providers, payers, business and labor, and HSCRC staff – to put aside provincial interests in favor of producing the healthiest hospital system in America.’”

In other words, Maryland’s experiment with rate setting survived because it was a collaborative effort. Rather than focusing on their own interests, participants thought collectively. And to this day, they continue to refine how they set prices.

Paying for Quality

The one element missing in Maryland’s original scheme is that it did not allow payers to reward hospitals that provide better quality care—or penalize those that fall short. But this is changing: “In 2008, the Maryland hospital association made voluntary agreements with insurance companies not to bill for eight medical errors, including transfusions that use the wrong blood type and surgery on the wrong body part.” observes Dr Lesley Russell, an Australian who is currently a Visiting Fellow at the Center for American Progress in Washington D.C.

Jump-Starting Reform: Following Maryland’s Example

Russell, suggests that that Australia might learn something from Maryland. What about the rest of the U.S.? Although some reformers have discussed the possibility of the government setting hospital rates, this idea, like so many other good ideas for reform, hasn’t gotten very far in Washington.

To be honest, I cannot quite envision the federal government assessing rates for all of the services provided by all of the hospitals in the U.S., adjusting for the cost of labor in each town, how much charity care a hospital provides, and the cost of teaching medical students.

Perhaps it could be done, but I can only imagine the complexity of the task—and the politics as Congressmen vie for higher rates for their states. No doubt the American Hospital Association would want to weight in—as would national lobbies representing insurers.

Ultimately, I believe that most healthcare reform must ultimately be done at a federal level. Our health care system is already both fragmented and inequitable; we don’t want to fracture it further. But in this case, setting hospital rates seem to me a task that might best be done by state regulators who are in a better position to know which hospitals require higher reimbursements to cover legitimate expenses such as charity care, and which hospitals have been using their market muscle to game the system –charging more without providing better care.

Just as in Maryland, a panel of state regulators would need to be protected from lobbyists and politicians. Since Medicare would be paying the fixed rates, it might set up a unit to investigate complaints of corruption or price manipulation. (Meanwhile, states interested in adopting the program would do well to investigate how the Maryland Commission has maintained a reputation for fairness.)

Yet, even with safeguards, I can foresee problems. In some states, hospitals are so powerful that they might well capture the regulators. On this score I cannot help but think of Massachusetts.

On the other hand, the Commonwealth boasts more than a few brilliant, progressive, and dedicated health care reformers. Their numbers include physicians, public health experts, nurses and hospital administrators.

At this point, I am convinced that reform can no longer wait for Washington. We need a movement on the ground. Those who want to re-shape our broken system should begin to lead the way—today. I suspect that in Massachusetts, and in many other states, a push for hospital rate regulation would have to come from within the medical culture—as it did in Maryland.

Wanted: Insider Agitators, ready and willing to call for price-setting that will help control costs; increase access to care; make fees for services equitable and transparent across hospitals, and enhance patient safety.

9 thoughts on “How Maryland “Broke the Curve”: A Solution For Massachusetts? Part 3”

Hi Maggie:
There was a time when states also had “usury” regulations in place which would set the interest rates for all banks within a state regardless of where the parent bank was chartered. Marquette National Bank vs. First of Ohmaha Service Corp. SCOTUS decision struck down all of the state usury laws as a violation of the National Banking Act. Brennan wrote the opinion for striking down state usuary laws and at the time expected Congress to act, setting in place modifications to the National Banking Act. Congress did nothing and we all realize where we are today with 21% interest rates being more the rule than the exception.
Given Congress’s failure to date on Healthcare reform, I would venture to say they would progress down the path of doing nothing over the next decade. We are one step awy from having Healthcare reform if the party of the majority in the Hose would beging to act like the party of the majority rather than a bunch of self-interested pirates. I wonder what the federal gov would do and SCOTUS if a challenge arose to state regulation over federal programs? I do not believe the Fed gov really can control the state costs from Washington DC and the responsibility may have to reside in states. So who carrys the banner on this one?

Prince George’s Hospital teeters on the brink and is heavily subsidized by the county and more recently the state of maryland. They say our cost mix does not reflect severity of illness or perhaps social problems such as homelessness and immigrants but the system may not be as good as it sounds.

Maggie,
I appreciate the conceptual appeal of an all-payer rate setting approach, especially its potential to improve care for the poor and to simplify administration. That said I would like to offer the following comments:
1. Any state that considers adopting an all-payer rate setting approach today is likely to find it very difficult to win buy-in from either Medicare or Medicaid due to the severe adverse impact the recession had on both the federal and state budgets. Why would they agree to spend more money than they are already spending to enable private insurers to pay less?
2. I’m not sure I understand how the rate setting panel would set rates for inefficient hospitals that are inefficient because they are old and antiquated, are poorly managed and/or are operating well below an efficient occupancy level. These are high fixed cost facilities by their nature, after all.
3. Conversely, I think hospitals that are well run and either provides good care at low cost or well above average care at a competitive cost should be rewarded with an above average profit margin.
To make the healthcare market function more like a normal market, I offer the following recommendations:
1. Provide both patients and referring doctors with actual insurer reimbursement rates for all procedures as well as information regarding infection rates, readmission rates, mortality, volume of various surgeries performed, etc. in an easily accessible, user friendly format. This should allow referring doctors to help patients make more cost-effective healthcare decisions.
2. At the recent conference sponsored by Academy Health and Health Affairs that I attended, I asked Uwe Reinhardt for his thoughts on how to get patients to care about costs even when insurance is paying. His response was that they absolutely need to have some “skin in the game” in the form of coinsurance (but not deductibles). In response to a follow-up question regarding tiering or requiring patients to pay a higher coinsurance amount if they wanted to use one of the high cost hospitals that does not provide better care but is high cost because of its local market power, he said that was a sensible idea which was proposed as long as 20 years ago in California but was never really taken up. Such a tiering approach could help to provide insurers with the countervailing power they need to negotiate with the more powerful providers.
3. An alternative approach to price negotiation offered by one of the other presenters at the conference was what he called “baseball arbitration.” In baseball arbitration, each side proposes its last and best offer and, if they can’t reach an agreement on their own, the arbitrator picks one or the other with no opportunity to split the difference or take features from each one. He said it tends to rein in expectations on both sides. Obviously, the arbitrator(s) would have to be trusted by both sides and be insulated from and independent of politics.
You also mentioned bundling which is a concept that I really like because I think it would better align incentives in the system. I was somewhat disheartened, however, to hear Susan DeVore, CEO of Premier Inc., an alliance of 2300 hospitals and 64,000 other healthcare facilities, state categorically that hospitals simply do not have the infrastructure currently to handle bundled payments and divide them up fairly and appropriately with all the other providers involved in the care episode.
Finally, regarding your comment about 80% of healthcare costs related to the management of chronic disease, it includes virtually all of my costs which are heart related. I take several thousand dollars worth of prescription drugs each year. It’s an easy matter to ask about generics and to find the least expensive pharmacies. With adequate price and quality transparency information, referring doctors will know which labs, imaging centers, physical therapy facilities, etc. can provide good quality care for the lowest cost. Referring doctors can also help select surgeons, oncologists, and the like that provide high quality care for a reasonable cost if they have the appropriate information available. At the end of life, they can also be helpful in guiding patients toward hospice and palliative care resources. The fact is that very little care is delivered under true emergency conditions where price and quality shopping is both impractical and impossible.

Linda,
Linda-I can well imagine that there are individual hospitals that are not beeing adequately compensated under the Maryland plan.
But I have heard from a doctor at a safety net hospital in Maryland that is about 1% in the red. He says that the system is flawed, but “pretty good . .”
But that is just one man’s opinion.
If I had time I would spend a few weeks just calling round to hospitals in Maryland, seeing who would talk to me, and finding out more.
From what I know at this point, it seems that this reform that has worked pretty well.
But I don’t know the whole inside story.
There was a time when very good print journalists were paid to spend the time to do the sort of in-depth journalism that could find out more.
The Baltimore Sun has always had some wonderful reporters.
But sadly, today, most jouranlists are paid to churn out more very short stories more frequently.
This means that the best reporters don’t have the time to do the in depth interviews needed to answer important questions.
If you know any doctors or hospital administrators from Maryland who would talk to me, please let me know (Mahar@tcf.org).

Barry–
Maryland agreed to pay the rates the state set as long as the cost of hopstial reimbursements in Maryland didn’t rise as quickly as in the rest of the country.
And for more than 30 years, they haven’t–which is why Medicare has stuck with the program.
Costs are not being shifted to areas outside of hospitals, which is why insurance premiums in Maryland (as a % of income)
are lower than in any other state in the nation.

“Costs are not being shifted to areas outside of hospitals, which is why insurance premiums in Maryland (as a % of income)
are lower than in any other state in the nation.”
I would like to cite this – do you have a source? Thank you

Rate review (in place since 1976) might have minimized the bizarre machinations that occurred in other markets over the last three and a half decades, for-profit hospital price gouging and cost shifting for uninsureds to name a few.
1. HCA has no hospitals in Maryland.
2. Maryland’s uninsured rate is traditionally below the national averagehttp://www.pnhp.org/news/2004/june/forprofit_hospitals.php
Rate review ensures all payors participate in the cost shift. Twenty years of cost shifting in a state with 25% uninsureds takes a heavy toll on rational charge masters.